Undisclosed Risk Nixes Pepper Hamilton's $10M Excess Insurance in Malpractice Case
Two excess insurers for Pepper Hamilton don’t have a duty to indemnify the law firm and a partner in a malpractice case. That’s because they didn’t disclose a known risk of litigation to the carriers before the $10 million contract of umbrella coverage was issued, says New York’s top court.
The New York Court of Appeals held Pepper Hamilton had a duty to disclose in advance to the insurers the firm’s potential involvement in litigation concerning fraudulent loan securitization activities by its client, Student Finance Corp., according to the New York Law Journal. The court applied Pennsylvania law in the case, which the parties agreed was controlling.
The decision overruled an earlier holding by the Appellate Division, First Department, that the law firm didn’t have a duty to disclose because it had not been involved in wrongdoing.
But the undisclosed, foreseeable risk of a SFC-related claim against Pepper Hamilton and partner W. Roderick Gagné, even though they had not been involved in SFC’s wrongdoing, violated a “prior knowledge” coverage-exclusion clause in the indemnity policies, the Court of Appeals held. Hence, the carriers are not required to indemnify the firm and Gagné in SFC-related claims.
“Given the law firm defendants’ role in the securitization of the loans and Gagné’s close involvement with SFC, a reasonable attorney with the law firm defendant’s knowledge should have anticipated the possibility of a lawsuit, particularly when millions of dollars may have been lost from activities of which they were aware,” writes Judge Theodore Jones Jr. in the court’s unanimous 6-0 opinion.
In 2002, when the law firm applied for the excess coverage, Gagné told Pepper Hamilton’s general counsel, in response to a question about the insurance application, that he knew of two suits related to SFC transactions, the ruling recounts. He was, he told the GC, “not certain” about whether the law firm might be joined in the litigation in the future.
Additional coverage:
Philadelphia Inquirer: “Court: Law firm can’t tap its insurers”
Updated at 7:05 p.m. to link to Court of Appeals opinion and on Oct. 29 to link to subsequent Philadelphia Inquirer coverage.
